Types of Cost Concept with Examples and Practice MCQs
The cost concept in accounting states that assets and expenses are recorded in the books at their original purchase price or cost. Understanding the cost concept is fundamental for students preparing for school exams, CA Foundation, and competitive Commerce papers, as well as for practical business decision-making.
| Cost Type | Definition | Example |
|---|---|---|
| Actual Cost | Amount paid for acquiring an asset or service. | Purchase price of machinery. |
| Opportunity Cost | Benefit foregone by choosing one alternative over another. | Interest lost by investing funds in assets. |
| Sunk Cost | Cost already incurred, cannot be recovered. | Marketing expenses of previous year. |
| Fixed Cost | Remains constant regardless of output level. | Rent paid for factory building. |
| Variable Cost | Changes with the level of production. | Raw material expenses. |
| Imputed Cost | Costs not actually incurred but considered for decision-making. | Owner’s salary not withdrawn. |
Cost Concept in Accounting
The cost concept is a key accounting principle. It requires recording assets and expenses at the original acquisition cost. This principle helps maintain objectivity and reliability in accounting records, supporting students in exams and real business scenarios.
Types of Cost Concepts
Different types of costs help classify expenses for accounting and decision-making. These include:
- Actual and Opportunity Costs
- Fixed and Variable Costs
- Direct and Indirect Costs
- Sunk Costs
- Imputed Costs
- Prime and Distribution Costs
Knowing these types helps students answer MCQs and understand cost sheet preparation, as in Features of Cost Sheet.
Cost Concept MCQs: Practice and Answers
Try these sample MCQs to test your understanding of cost concepts, cost classification, and their application in business:
-
What does the cost concept imply in accounting?
(A) Assets are recorded at market value
(B) Assets are recorded at original purchase cost
(C) Assets are not recorded
(D) Assets are estimated annually
Answer: (B) Assets are recorded at original purchase cost.
Explanation: The cost concept records all assets at the actual amount paid at the time of purchase. -
Which cost remains unchanged even when production is zero?
(A) Variable Cost
(B) Fixed Cost
(C) Marginal Cost
(D) Sunk Cost
Answer: (B) Fixed Cost.
Explanation: Fixed costs like rent remain even if nothing is produced. -
What is the sum of all direct costs called?
(A) Prime Cost
(B) Sunk Cost
(C) Imputed Cost
(D) Distribution Cost
Answer: (A) Prime Cost.
Explanation: Prime cost is the total of all direct materials, direct labour, and direct expenses. -
Which of the following is an example of a sunk cost?
(A) Wages paid in current production
(B) Cost of old machinery already bought
(C) Interest on a new loan
(D) Future salary of workers
Answer: (B) Cost of old machinery already bought.
Explanation: Sunk cost cannot be recovered and does not affect future decisions. -
Opportunity cost can be best described as:
(A) Cash spent directly
(B) The next best alternative forgone
(C) Depreciation
(D) Profit earned
Answer: (B) The next best alternative forgone.
Explanation: It's the value of benefit lost when one alternative is chosen over others. -
Rent paid for a warehouse is categorized as:
(A) Production Cost
(B) Sunk Cost
(C) Prime Cost
(D) Distribution Cost
Answer: (D) Distribution Cost.
Explanation: Expenses for delivering products from the factory to the customer are distribution costs. -
Imputed cost is:
(A) Recorded in books
(B) Only notional; not shown in accounts
(C) Paid in cash
(D) A direct cost
Answer: (B) Only notional; not shown in accounts.
Explanation: Imputed costs are hypothetical and not recorded in cash books. -
The cost of submitting a tender refers to:
(A) Fixed cost
(B) Estimated selling price
(C) Direct labour
(D) Distribution cost
Answer: (B) Estimated selling price.
Explanation: The tender cost is the estimated cost at which goods/services are offered. -
Which of the following is not part of cost accounting?
(A) Prime cost
(B) Sunk cost
(C) Opportunity cost
(D) Profit sharing
Answer: (D) Profit sharing.
Explanation: Profit sharing relates to distribution of profits, not cost calculation. -
In a toy manufacturing company, which costing method is preferred?
(A) Job costing
(B) Batch costing
(C) Process costing
(D) Standard costing
Answer: (B) Batch costing.
Explanation: Products are manufactured in batches and costs are computed per batch.
Exam Tips for Cost Concept MCQs
- Read the question carefully, noting keywords like “actual,” “fixed,” “opportunity,” or “sunk.”
- Remember, cost concept always values assets at original payment, not market value.
- For cost classification, focus on whether the cost changes with output (variable) or remains constant (fixed).
- Link practical examples to definitions to avoid confusion.
- Review more on Classification of Costs and Core Cost Concepts at Vedantu.
Applications and Real-Life Examples
The cost concept guides businesses to avoid overvaluation of assets in financial statements. For example, a machine purchased for ₹5,00,000 is always shown at this amount, regardless of market fluctuations. This also forms the basis of depreciation, as taught in topics like Methods of Depreciation.
Further Learning and Related Topics
- MCQs on Cost Sheet
- Methods of Costing
- Meaning of Cost, Costing and Cost Accounting
- Class 11 Cost Accounting Solutions (TS Grewal)
To sum up, mastering the cost concept and its various types (actual, sunk, opportunity, fixed, variable, and imputed) helps students perform well in school and competitive exams. Regular practice with cost concept MCQs, along with using Vedantu’s clear resources, builds accurate understanding for both academic and professional success.
FAQs on Cost Concept MCQ Questions and Answers for Commerce Exams
1. What does the cost concept mean in accounting?
The cost concept in accounting dictates that all assets are recorded at their original purchase price. This is crucial for accurate financial reporting and understanding a company's financial health. It ensures consistency and objectivity in asset valuation.
2. What are the different types of cost concepts?
Several cost concepts exist, vital for cost accounting and MCQs. These include:
- Actual cost: The real amount spent.
- Opportunity cost: The potential benefit lost by choosing one option over another.
- Fixed cost: Costs that remain constant regardless of production levels.
- Variable cost: Costs that change directly with production.
- Sunk cost: Past expenditures irrelevant to future decisions.
- Imputed cost: Notional cost for internally-used assets.
3. What is the definition of cost in accounting?
In accounting, cost refers to the amount of resources sacrificed to acquire an asset or provide a service. This aligns with the cost concept, emphasizing the original purchase price as the basis for recording. Different types of costs, such as fixed, variable, and opportunity costs, help in understanding the total cost of a business operation.
4. How is cost classified in economics?
Economic cost classification distinguishes between explicit costs (actual monetary payments) and implicit costs (opportunity costs). Understanding these distinctions is crucial for analyzing profitability and making informed business decisions. This impacts MCQs on cost accounting and economic analysis.
5. Which cost remains even when production stops?
Fixed costs remain even if production halts. These are essential for understanding break-even analysis and cost-volume-profit (CVP) analysis. This is a frequent topic in cost accounting MCQs for Class 11, Class 12, and CA Foundation.
6. What is the cost of tender?
The cost of tender refers to the expenses incurred in preparing and submitting a bid for a contract or project. It includes costs associated with research, preparation, and submission of the bid document. Understanding this is crucial in business decision-making and project costing. While not explicitly part of standard cost concept definitions, understanding such costs demonstrates a broader grasp of cost accounting principles.
7. What are the types of cost concepts frequently asked in MCQs?
Common cost concepts in MCQs include fixed costs, variable costs, direct costs, indirect costs, marginal cost, average cost, and opportunity cost. Understanding the definitions and differences between these cost types is essential for success in cost accounting exams.
8. How do you classify costs as direct or indirect?
Direct costs are directly traceable to a specific product or service (e.g., raw materials), while indirect costs are not (e.g., factory rent). This is a core concept within cost accounting and is frequently tested in MCQs. Accurate classification is crucial for effective cost ascertainment.
9. Which costs continue even when a business stops production?
Fixed costs, such as rent and salaries, continue even if production stops. Understanding this distinction between fixed and variable costs is vital for cost accounting and MCQs on cost behavior.
10. What is a practical example of the cost concept in real life?
A practical example is buying a car. The cost concept dictates that the car is recorded at its original purchase price, regardless of its market value fluctuating later. This applies even if it appreciates or depreciates, adhering to the historical cost principle.
11. Where can I download cost concept MCQs with answers in PDF?
While I cannot provide specific links to PDF downloads, searching online for "cost concept MCQs PDF" or "cost accounting MCQs with answers PDF" may yield relevant results from educational websites. Always verify the credibility of the source before using any downloaded material.
12. How do cost concepts affect the preparation of final accounts?
Cost concepts are fundamental to preparing final accounts. The cost concept, particularly the recording of assets at historical cost, directly impacts the balance sheet. Understanding different cost classifications (fixed, variable, etc.) affects the profit and loss account.
13. Why is recording at historical cost considered more reliable than at current value?
Recording assets at historical cost is considered more reliable because it is objective and verifiable. Current values are subjective and prone to manipulation. The historical cost principle ensures consistency and comparability across different accounting periods, a key aspect of financial reporting.
